Mitigation costs across sectors and macro-economic costs

The costs of implementing the Kyoto Protocol are estimated to be much lower than the TAR estimates due to US rejection of the Protocol. With full use of the Kyoto flexible mechanisms, costs are estimated at less than 0.05% of Annex B (without US) GDP (TAR Annex B: 0.1–1.1%). Without flexible mechanisms, costs are now estimated at less than 0.1% (TAR 0.2–2%) (high agreement, much evidence) [11.4].

Modelling studies of post-2012 mitigation have been assessed in relation to their global effects on CO2 abatement by 2030, the carbon prices required and their effects on GDP or GNP (for the long-term effects of stabilization after 2030 see Chapter 3). For Category IV[19] pathways (stabilization around 650 ppm CO2-eq) with CO2 abatement less than 20% below baseline and up to 25 US$/tCO2 carbon prices, studies suggest that gross world product would be, at worst, some 0.7% below baseline by 2030, consistent with the median of 0.2% and the 10–90 percentile range of –0.6 to 1.2% for the full set of scenarios given in Chapter 3.

Effects are more uncertain for the more stringent Category III pathways (stabilization around 550 ppm CO2-eq) with CO2 abatement less than 40% and up to 50 US$/tCO2 carbon prices, with most studies suggesting costs less than 1% of global gross world product, consistent with the median of 0.6% and the 10–90 percentile range of 0 to 2.5% for the full set in Chapter 3. Again, the estimates are heavily dependent on approaches and assumptions. The few studies with baselines that require higher CO2 reductions to achieve the targets require higher carbon prices and most report higher GDP costs. For category I and II studies (stabilization between 445 and 535 ppm CO2-eq) costs are less than 3% GDP loss, but the number of studies is relatively small and they generally use low baselines. The lower estimates of the studies assessed here, compared with the full set of studies reported in Chapter 3, are caused mainly by a larger share of studies that allow for enhanced technological innovation triggered by policies, particularly for more stringent mitigation scenarios (high agreement, medium evidence) [11.4].

All approaches indicate that no single sector or technology will be able to address the mitigation challenge successfully on its own, suggesting the need for a diversified portfolio based on a variety of criteria. Top-down assessments agree with the bottom-up results in suggesting that carbon prices around 20-50 US$/tCO2-eq (73-183 US$/tC-eq) are sufficient to drive large-scale fuel-switching and make both CCS and low-carbon power sources economic as technologies mature. Incentives of this order might also play an important role in avoiding deforestation. The various short- and long-term models come up with differing estimates, the variation of which can be explained mainly by approaches and assumptions regarding the use of revenues from carbon taxes or permits, treatment of technological change, degree of substitutability between internationally traded products, and the disaggregation of product and regional markets (high agreement, much evidence) [11.4, 11.5, 11.6].

The development of the carbon price and the corresponding emission reductions will determine the level at which atmospheric GHG concentrations can be stabilized. Models suggest that a predictable and ongoing gradual increase in the carbon price that would reach 20–50 $US/tCO2-eq by 2020–2030 corresponds with Category III stabilization (550 ppm CO2-eq). For Category IV (650 ppm CO2-eq), such a price level could be reached after 2030. For stabilization at levels between 450 and 550 ppm CO2-eq, carbon prices of up to 100 US$/tCO2-eq need to be reached by around 2030 (medium agreement, medium evidence) [11.4, 11.5, 11.6].

In all cases, short-term pathways towards lower stabilization levels, particularly for Category III and below, would require many additional measures around energy efficiency, low-carbon energy supply, other mitigation actions and avoidance of investment in very long-lived carbon-intensive capital stock. Studies of decision-making under uncertainty emphasize the need for stronger early action, particularly on long-lived infrastructure and other capital stock. Energy sector infrastructure (including power stations) alone is projected to require at least US$ 20 trillion investment to 2030 and the options for stabilization will be heavily constrained by the nature and carbon intensity of this investment. Initial estimates for lower carbon scenarios show a large redirection of investment, with net additional investments ranging from negligible to less than 5% (high agreement, much evidence) [11.6].

As regards portfolio analysis of government actions, a general finding is that a portfolio of options that attempts to balance emission reductions across sectors in a manner that appears equitable (e.g., by equal percentage reduction), is likely to be more costly than an approach primarily guided by cost-effectiveness. Portfolios of energy options across sectors that include low-carbon technologies will reduce risks and costs, because fossil fuel prices are expected to be more volatile relative to the costs of alternatives, in addition to the usual benefits from diversification. A second general finding is that costs will be reduced if options that correct the two market failures of climate change damages and technological innovation benefits are combined, for example, by recycling revenues from permit auctions to support energy-efficiency and low-carbon innovations (high agreement, medium evidence) [11.4].